Austerity hit the wrong targets – Plan A has long since been abandoned

The problem with Plan A, the government’s June 2010 Plan to get rid of the deficit this Parliament, was it relied on a big hit on the private sector. The Plan was to increase cash public spending over the five years, and to pay for the extra spending and get rid of much of the inherited deficit at the same time by a huge tax increase. It was tax and spend on a vast scale.
It was misrepresented by many commentators as a big cut in public spending – because the original plans were for an even larger cash increase in public spending. Austerity was not visited on the public sector in the way it was on the private sector. Even now, during a wage freeze in the public sector, public sector wages are going up faster than private sector wages.
Now we hear endless arguments about sticking to the Plan. I do not know why. The government abandoned the Plan shortly afterwards. We are well into Plan B, which has delayed cutting the deficit because they now realise they will not get all the extra tax revenue they wanted. We are also into Plan C, a plan based on an attempted large increase in capital spending, the one area they did cut at the outset, based on Labour’s planned cuts.
Before people can comment sensibly on what the Chancellor should do next to rescue some growth, they need to understand what has happened so far. It is silly having to field interviews based on the false premises that they cut public spending, and that they are sticking to Plan A. This week I will be looking at the options for the Budget in more detail. I will include inflation and energy prices, banking and credit, public current spending, capital spending, and taxes.

62 Comments

Eventually you can get all the way to plan Z provided the markets give you that much leeway. The “plan” will need to be to be constantly changed until someone (and looking in the HoCommons he does not seem to be there at the minute) can deal with the fundamental issues causing this crisis. Firstly the unsupportable debts created by the state involving itself in areas that it has no place. Secondly taking on the Banks who triggered it by dumping their debts onto the states already unsupportable pile. There is to nothing stop them doing it again if they have a “taxpayer put” to underwrite their actions or no threat of serious jail time. The bankers can defend themselves in court by saying “excessive risk taking” is no crime, yes but speeding on the M1 is another excessive risk and you should be dealt with accordingly when everyone else has to pick up the pieces.

Clearly infrastructure like HS2, school building, wind subsidies and the like are very, very long term at best. They will clearly produce no return (over digging and filling in pointless holes) in the short term and only a little more in the long term. They just divert resources from the productive to the largely pointless as does all the payment to augment the feckless.

We need a small state vision, 30% lower wages and pensions in the state sector, the private sector need some banking, lower taxes, lower fuel costs, fewer regulations and sane employment laws.

Nearly three years and no real attempt to even start to do the right thing. With the predictable results we see.

I see Lady Hall, the first Woman to be appointed to the Supreme Court, seems to think that there should be active discrimination against men in the legal profession. In the “BBC think” woman’s hour mode

Had the men at the Supreme Court said that they thought they should actively discriminate against woman, they would surely have had to resign. I cannot really see any difference in her position whatever.

Positive discrimination for some is, by definition, active discrimination against others, it cannot be anything else. It clearly would result in worse appointments.

She certainly seems to have a total lack of belief in the ability of women to make it on merit.

The real problem is that many woman choose not to make the compromises needed. They often simply make other life choices. If you promote them over men who have done, then this is blatant and damaging discrimination.

If you do a survey on the motivation of men and women this difference if very clear every time. Anyway fewer, largely overpaid lawyers, of either genders would be a very good thing.

Clearly infrastructure like HS2, school building, wind subsidies and the like are very, very long term at best. They will clearly produce no return (over digging and filling in pointless holes) in the short term and only a little more in the long term. They just divert resources from the productive to the largely pointless as does all the payment to augment the feckless.

Since when has building schools produced little returns and augmented the feckless?

What augments the number of feckless is the state diverting others taxes to pay them and encourage them to be feckless.

School building clearly are unlikely to make people cleverer and even if they did it is a long time before they would ever pay substantial taxes back through any increased earnings. Especially when they are primary or nursery schools.

If you really wanted to return Labour their own favour from the last year of their government then you’d get the Bank of England to create £200 billion of new money, which it would then indirectly lend to you to help fund your excessive spending.

The Bank couldn’t lend it to you directly, through an overdraft or through direct purchases of gilts from you, because not only would that be contrary to EU law it would also be too transparent, but if you got the Bank to buy up previously issued gilts from private investors then the private investors could use the sales proceeds to buy new gilts from you and so fund your budget deficit.

But then Osborne, who failed to explain and roundly condemn this novel funding device during 2009, has since done the same to the tune of £175 billion.

And at no point have MPs been asked to authorise the creation of these vast sums of new money, even though the inevitable inflationary effects are akin to taxation and MPs claim that they jealously guard their control over taxation.

So the Conservatives should do something that will show they don’t know how to run the economy and will lead to them not being re-elected for another 15 years, so Labour will have problems in 2015. I doubt that will help the Conservatives in the long run.

Trying to do the right thing isn’t helping, and they’re only paying lip service, they still not cutting but getting accused of savage cuts. At least if they just stuck the hatchet into income tax per se alot of us would be better off, not scrounges though, then labour would have to raise the tax openly and get the blame as the Tories and media could requote labour and say, stop blaming the last government. Simples. Labour doing that now and people believe them.

I remember your initial article after the election when you gave detailed plans on how to reduce the civil service by natural attrition. Nothing much has been reported on this – although that means nothing. Down here, we get the impression that the Civil Service and government generally are actually growing.

The reporting of all this has been, frankly, lamentable. All we heard was a long moan about “cuts”. It was as if the script, on the BBC at least, was written by the Labour Party. No newspaper, to my mind, has actually told us what was going on either.

Thirdly, thank you for number crunching. You are the only way normal people like me can find out what is actually going on. We braced ourselves for a recession. Now we seem to be paying out for nothing. (Taxes up nearly 40%!)

Reply The government claims that the civil service has been slimmed substantially. One day I will have a good look at the numbers and set them out, but it is complicated owing to changes of definition etc.

I cant work this out either. The Govt claims public sector employment is down from c. 6m to c. 5m. Where on earth is all the money going then?! We really need much more granularity in the presentation of public spending. All taxpayers have the right to know where our money is going. What we need is – clearly laid out – spending by Govt dept sub-divided into different segments, down to the level of c. £1bn per segment. We need comparative figures going back 3 / 5 years and going forward into the projected period. Only then can we have a debate. Taking selected numbers, changing definitions etc is what Gordon Brown used to do. He managed to dodge proper scrutiny for years by this means and that is largely why we are now in this awful mess.

It is quite simple. The work previously done by the civil servants is now done by private companies under contract. They employ the previous civil servants at slightly lower rates but due to their overheads and need make profits the government finishes up paying more.

In local government we even find the private companies are actually owned by the councils who outsourced the work.

“One day I will have a good look at the numbers and set them out, but it is complicated owing to changes of definition etc.”

Anecdotally, one reads of civil servants moving from one job to another collecting severance payments on the way and either taking a new permanent role or becoming a contractor elsewhere. There seems to be a flow between central and local government and into quangos, think tanks, the BBC etc. Such people have transferable skill sets, ie none.

Government can spend money on itself or on contractors or contracting companies or PFI or run up huge pension liabilities or pay out huge amounts in redundancy; ultimately, it is the present cost of government and its future liabilities which need to be substantialy reduced. Trying to count heads against a background of so much obfuscation may not be worth the candle when wind drops.

Not only should the costs of the civil service be put under the microscope but so should the calibre of its senior members such as those responsible for the NHS. Going back many years a doctor I knew told me that the Social Services spent most of their time in ‘Case Conferences’ in which the whole dept sat round a table to discuss their ”problem family’. I see that Jeremy Paxman complained that there were too many managers at the BBC and they also spent a lot of their time in meetings. Does the Civil Service actually do anything other than hold meetings; does anything ever get decided? How can they decide something when they don’t know anything about anything such as when badgers make themselves unavailable for culling ? How would the rest of us achieve anything if we spent all our time in meetings?

Thanks to the information you post on your site, we have all understood that the Labour Mantra of “cuts too deep and too fast” is a load of nonesense, that major tax rises and a reliance on so called growth, was the major part of the real plan.

So why did Cameron and Osbourne not say so.
Why go along with the lie of big cuts.
The truth eventually comes out, so they just look dishonest and incompetent now.

Meanwhile Cameron has pushed forward on gay marriage, foreign aid, alternative energy policies and the like.
Was this some sort of expensive distraction technique ?

Given the real figures are now begining to be exposed, will we have some real policies to resolve them.

As for the Public sector, regrading or reclassification of a job is the usual way out of a so called pay freeze for them, it also happened decades ago in the private sector when company cars were introduced for all and sundry as a way of getting around such restrictions, then imposed by Labour.

Poor/lazy media reporting has covered up the real situation for far too long.

Let us hope that we can now have a real and proper discussion of the problems we face as a Country, using facts instead of spin.

We inherited a public sector dominated economy in 2010. It has not changed. Schoolboys could have told Osborne he needed to cut public sector jobs and wages. A 20% cut in both would not have been unreasonable. Borrowing to fund subsidy driven industries is NOT capital investment, just as Brown’s borrowing to pay for public services was not investment. Investment in roads and the estuary airport are likely to be far more fruitful than investment in HS2 and windfarms, simply because they will increase productivity and will not require subsidy in perpetuity.

Osborne did try cutting hundred of thousands of jobs in the public sector to create millions of jobs in the private sector; the result was the public sector couldn’t function with so few staff and the private sector barely created enough jobs to replace the ones lost. So cutting the private sector won’t fix any of the UK’s problems and may even make them worse.

Good left wing propaganda Uni but sadly its not born out by the facts, but dont let that stop you.
The private sector has created more jobs than have been lost in the public sector.
And I love your line….”The result was the public sector couldn’t function with so few staff”
Best laugh Ive had for ages.

It has been two and half years wasted with little effective remedial action taken to repair the broken UK economy or to arrest the national decline. The ruling political class – the chumps in charge since 1997 – bear a very heavy responsibility.

At last – refreshing honesty recognising that George Osborne is a massive tax & spend Chancellor and the Gov’s approach to the economy has nothing to do with austerity. Moody’s stripping the UK of its AAA status was inevitable. Mr Osborne is a failed disciple of Gordon Brown – failed to get on top of Gov spending, failed to kick start growth, failed to control inflation, failed to get much needed credit to our SME’s, failed to develop alternative debt capital markets to bank lending; failed to stop ruinous cost of living increases to fuel, energy etc. Unfortunately for the UK, the Chancellor, Mr Cameron seems wilfully blind to his Chancellors shortcomings so the UK economy is doomed to stagnate / decline to usher in a Labour majority at the next GE. Goodness only knows what will happen to the economy then.

Thanks again for setting out the facts so succinctly. I can think of no other politician who has so openly stated the facts of the fiscal position and plans rather than the fiction which has suited the leadership of the three main parties. The coalition encouraged an ignorant media that they were making ‘cuts’, when overall they were increasing spending, to pretend they were ‘taking the tough decisions’. Labour were happy to go along with this myth so that they could pretend to differentiate themselves from the coalition. The media tamely co-operated in this illusion. Your analysis in 2010 convinced me that none of the main parties were worth voting for as they are all addicted to tax, spend and waste. Are you a lone voice in parliament prepared to state the facts rather than the fiction?

Reply: I do often seem to be the only one who reads and uses these crucial numbers – and about the banks.

Thanks for laying out the facts. The problem is when I read posts like this it males my blood boil. It was patently obvious to a non economist layman like me on the outside that public finances were in a bad state before the banking crisis slammed the nail in the coffin.

Indeed I seem to remember Mr Darling himself speaking out about the state of the Treasury when he took over as Chancellor.

The problem for me in 2010 was always uncertainly so to trim at the margins and rely on continued growth , particúlarly with the EZ situation was never a good bet.
Whilst the going was good the new govt should have drawn a line in the sand then and instigated the cutbacks needed, even if it meant taking a hit by giving over generous severance payments to public servants so they have the cushion to go and re organise ther lives.

There are many studies to show that if you take drastic action to reduce the overheads of the state and do it quickly the economy will start growing again after the shock and put everything on track. Canada did it in the nineties with success.

All this does is gives ammunition to “I told you I was right” Ed Balls/BBC/Guardian types that the root cause of this is lack of govt investment when we know the real reason that govt is locked into too much expenditure for the size of the economy and its tax base.

It looks like a vicious circle that will need higher calibre public servants than we have right now to sort out.

The truth hurts – the worry is that nobody else seems to see it. Can we all be so out of step?
JR your message just does not seem to get through – it does seem to be getting pointless unless of course you change the leader.

None of these plans involve actual cuts as understood by the normal person, which proves my point that Politicians and Civil Servants speak a different language from the rest of us.
All the “cuts” involve reductions in an projected budget, but are in fact increases on the previous year’ expenditure.
It is as if I were to budget for a 10% increase in my pension from April and then be told that I was only going to get 5%. This, in Civil Service terms, would be a 5% “cut” in my pension with all the dire consequences that such a cut would bring.
We need to decrease expenditure in real terms, not make pretend cuts in mythical inflated budgets
Afterthought: My state pension will go up by just under £20 per month in April, which will just about cover the extra cost of filling my car with petrol compared with a couple of months ago! The state gives with one hand and immediately takes away with the other.

Let’s face it, the jolly ship, Cameron Osborne, is foundering and heading straight for the rocks. It is too late to correct course, we have to take the hit and repair the superstructure after the full damage has been assessed.

You had you opportunities to do something for our Nation, Dave but you blew it. You appointed old school buddies instead of the tried and tested talent at your disposal and your mates failed you just as you failed us. And now you have condemned the Nation to another devastating term of Labour and their wealth destroying policies.
We have nothing to look forward to but 3rd World Status and all because the political leaders did not consider the future before they dived in to try to buy votes with the tax payers own money.

“Now we hear endless arguments about sticking to the Plan. I do not know why. The government abandoned the Plan shortly afterwards. We are well into Plan B, ”

That will be news to the public face of Mr Osborne then, in media interview after media interview and at the despatch box he continues to claim that he is on plan (“A”, logically) and when ever challenged by Ed Balls about Plan “B” he deigns that there is such an alternate plan and nor will there be. So to answer your question John, because Mr Osborne keeps telling us that he is sticking to his plan (“A”) – talk about a PR disaster zone, but thanks for the explanation as to why Ed Balls keeps taunting Osborne on this, it makes a lot more sense now!…

I just hope that now the beloved and “Brighton or Bust” Triple A rating has gone less emphasis will now be placed on the political PR and more on the actual facts by No.11.

I realise that it’s necessary to be careful in interpreting these numbers because of the ways they are defined, but if Plan B meant that in 2014-15 spending would be £731bn and tax revenue would be £604bn then wouldn’t the government still be borrowing 19% of all the money it was spending?

Roughly speaking, spending five pounds for every four pounds of income.

Or to put that in more familiar household terms, it would be like someone with an income of £20,000 a year spending £25,000 a year, and without any prospect of an inheritance or other windfall which would enable him to clear his accumulated debts.

Is that correct?

Reply Nearly – there are other income items for the state sector as well as taxes, but yes even on Plan A there would still be borrowing in Year 5. Othe receipts take total income up to £700bn 2014-15 under Plan A.

So under Plan A total spending in 2014-15 would have been £737bn, with total tax revenues of £656.5bn, which with other receipts would have given a total income of £700 bn; on that basis the government would have been borrowing £37bn out of the £737bn it spent, or about 5%.

As a rough calculation, adding the same amount for other receipts, £43 bn, to the £604bn 20124-15 tax revenues expected under Plan B would give total income of £647bn, which means that the government would be borrowing £84bn out of the £731bn it spent, or 11%.

So in round numbers it would now be like somebody with an annual income of £20,000 a year spending £22,500 a year, without any prospect of an inheritance or other windfall which would enable him to clear his accumulated debts.

That is still a long way from the 0.125% annual budget deficit that Mr Micawber warned would result in misery …

What should have happened is that on day one, instead of the Government spending 25% more than it was getting in, it should have forthwith started to spend 25% less, or at least say 10% less, with the Surplus used to start paying down Debt. And I don’t mean forecast earnings including an amount for a dreamy future growth. Growth is nice to have but till it arrives it should not be anticipated. If and when it arrives growth too can be used to pay down Debt.

Very nice summary of a blog-post.
The Chancellor seems to be surreptitiously allowing more spending under cover of the “special factors” – PO pension transfer and QE interest transfer.
On a detail: isn’t the latest estimate of private sector pay increases (from “experts” rather than the OBR), about 2.5%/a, thus, a tad above the public sector increase ?
This number seems a more credible reflection of where the economy really is.

How many plans is Osbourne allowed before he’s replaced with someone more likable and capable with a sensible plan and strategy and the ability to get his message across and the public on side?
Osbourne and his persona is a reason why the Tory’s might not being doing as we’ll as they might wish to be.

Osborne has shown courage and pragmatism by getting shale back on the agenda in the energy debate .

He probably ended up making the right decision for the wrong reasons and without any real understanding of the engineering involved himself but I’m glad he did not go along with the prevailing wisdom .

I’m not saying Osborne is a star but trying to being a financial comptroller in a Government run by the likes of Cameron and Clegg is a thankless task .

But what makes you think Osborne is actually trying to be a financial comptroller? He has no economic background or real interest in the subject or he would have a bigger vision than the tinkering stealth cuts he is so fond of, and be capable of articulating this. Yes, he inherited a heap of horror but all the more reason to have given 25 hours in every day working out how to fix it.

Time has run out for the coalition . The economy is in a real mess and there are no signs of anything positive happening to restore confidence . An immediate election should be called . A complete change in the running of the country is necessary to re-establish our priorities : out of Europe , a massive reduction in public expenditure , reformation of the education system , a return to Christian principles and the rule of law . These are but a few of the issues that need to be addressed and put to the people to decide .

They needed to stick to cutting spending especially when that’s what the public expected whether they liked it or not. Instead they got criticised for cutting when they backtracked on a chunk of it. Worst of both worlds, had the voter hit for the cuts but not the private sector recovery because they increased spending.

I know trhey protected NHS spending but do they have to agree to increase the range treatments offered?

They have taken the voter hit for a public sector pay freeze but there wasn’t one!

Automatic stabilizers, only if you can afford it and the economy is growing on a sound basis.

Please can someone explain why it makes sense for the Coalition to talk about spending cuts and take all the flak for the ‘cuts’ when in fact they are doing nothing of the kind.

I get why Labour go along with it. They want to spend more and it is easier to criticise the government by pretending they have the opposite policy (spending cuts) rather than the same one (spending more borrowed money).

The media maybe (mostly) too dumb to notice the difference between spending cuts and spending increases or perhaps simply think it makes a better story than the truth. Every good story has a twist and they may look forward to surprising a bewildered British public with the truth that after living through years of ‘austerity’ it was actually an illusion with with spending and debt growing massively higher.

But why does it make sense for the government to push this fantasy? Surely it is terrible politics, especially come the next election when the opposition can point out that this austerity has gone hand in hand with massive debt increases!

I suspect that the current Government is maintaining the austerity fiction to give them an excuse to shrink the state as much as possible for idealogical reasons. After all you can’t claim that you need to cut benefits in real terms due to a lack of money when you’re constantly borrowing more and more money.

I dont follow your logic at all Uni, because if, as you say, the Govt is trying to “shrink the State” by using the need for austerity as a reason, then why are they actually failing to do that and increasing spending on the State every year ?

Neo-Keynesian economics is a load of tosh. The reality is that if your revenue falls short, you have to cut MORE, not less. Total public expenditure should be held constant in cash terms at about £750 billion until revenue picks up sufficiently (and as I said in a previous blog, we can and should act so as to maximise CGT and income tax revenue).

David Cameron’s recent speech on Europe highlighted that the EU accounts for 7% of the world’s population, 25% of its production and 50% of its welfare costs. So asking that a substantial part of the cuts should come from welfare is not unreasonable.

The EU accounts for 50% of the world’s welfare costs because most countries outside the EU don’t have welfare systems. So Lindsay it is unreasonable to demand welfare cuts based on statistics you didn’t understand.

Uni, “most countires outside Europe dont have welfare systems” What like USA Australia South Africa New Zealand Brazil Argentina Gulf States etc etc
The problem is we in Europe have got used to a very good rising standard of living and world competition is currently making that harder to maintain.
Its the rise of the second and third world nations.
They are hungry and ambitious for the standard of living we have in Europe.
Either we compete or our standard of living is going to fall.

I bet your party love you being so critical of their policies on this blog.

Why do we have a Chancellor who knows nothing about finance and economics. He has a history degree and is a career politician. Answer – he’s in the right club, the right sort of chap, went to the right school, knows the right people, has lots of money…..
In a sensibly run company the finance director would have the appropriate qualifications and experience. This doesn’t seem to be the case when dealing with the country’s economy.
Mind you, are there any politicians who know very much. They can do speaches, TV rhetoric and spin.
‘You know I have taken new steps to make real changes to blah blah blah … The other party has continually failed to deliver blah blah blah …. That is why the [insert NHS, economy, education system, vulnerable person ……] is safe with me blah blah blah.’

‘Mind you, are there any politicians who know very much. ‘ Well a few perhaps and they are treated as Pariahs by the rest, extremists by the media and generally hoplessly eccentric. Disloyal too if they go against the (misguided but media friendly) party line.

About John Redwood

John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.